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IPOs: Look before you leap

Aug 19, 2008

The broader stock market meltdown in this year till date has also led to a drying up of new public issues in the primary market. As far as applicants (investors and speculators) in the ‘IPO boom’ of last year and early this year are concerned, considering the dismal ‘post-listing day’ performance of a large number of IPOs, there have been a lot of heart burns!. This is a sea change from the behaviour seen in 2007 when applicants had become too greedy to make quick bucks on listing. In fact, the whole perception of disciplinary investing had taken a backseat.

  • Also read - IPO 'refunds' made simpler

    2007 was the year of taking stock as was mentioned by us in our Stock Market Yearbook for that year. 2007 in fact was also the year of the IPOs. During that year, at Equitymaster, we gave views on nearly 31 issues (with issue size of Rs 1 bn and more). However, during 2008 till date, we have covered only 9 issues, out of which two did not even list (Emmar MGF and Wockhardt Hospitals) as these were not fully subscribed.

    Several promoters who were about to put their public issues on block have delayed/cancelled the same considering the volatility on the secondary markets. Simply put, they aren’t too optimistic about the markets (and so are their investment bankers), and as such have delayed their offers till the markets ‘stabilise’.

    As we can see from the above chart, the current year has seen the IPO markets dry out after a string show in 2007. Against Rs 1,018 bn of total equity money raised through IPOs in 2007, the total floatations this year (till July) have been Rs 503 bn. However, this includes the two mega IPOs of Reliance Power and Future Capital at the start of the year. Excluding these, the IPO market has been pretty dry.

    Here is a list of some of the IPOs we had reviewed for our subscribers and their performance till date, which has not been too exciting.

    Performance of key IPOs

    Company Issue price* Current price# Gains/(Losses) since listing
    Future Capital Holdings 765 345 -54.9%
    Reliance Power 281 162 -42.5%
    OnMobile Global 440 518 17.7%
    Wockhardt Hospitals 225-260 NL  
    Emmar MGF 540-630 NL  
    REC 105 89 -15.0%
    Titagargh Wagons 540 729 34.9%
    Gokul Refoils and Solvent 195 223 14.4%
    KSK Energy Ventures 240 160 -33.4%
    Top 5 performers
    Religare Enterprises 185 384 107.7%
    Koutons Retail 415 800 92.8%
    ICRA 330 628 90.4%
    Power Grid Corporation 52 94 80.9%
    Spice Comm. 46 74 61.4%
    Top 5 underperformers
    House of Pearl 550 106 -80.8%
    Brigade Enterprise 390 122 -68.8%
    IVR Prime 550 176 -67.9%
    Global Broadcast 250 100 -60.0%
    Omaxe 310 125 -59.7%
    * Adjusted for bonus, stock splits; # Closing price of 18th Aug 2008; NL - Not listed

    Like in stock market investing, i.e., investing in a listed entity, application to an IPO also needs careful due diligence from an investor’s standpoint. As we have reiterated in the past, IPOs must not be taken as a one time guarantee to make sure-shot gains on the listing date. In order to benefit from the long term growth prospects of the company issuing shares, it is imperative for the applicant to understand the business, the management’s vision and intentions of raising money, as also the valuations at which the issue is being offered.

  • Also read - Check List for IPO applicants

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